How to hit your student loan payment to hit your money goals while loan payments are still paused

While some of these activities have come back full force, one pandemic-era change has yet to make a comeback: federal student loan payments. And for many borrowers, it’s been a financial lifeboat. 

What’s the deal with federal student loans  

The pandemic ushered in mass layoffs, record-high inflation, supply-chain disruptions, and more. And in the face of this, the Trump administration moved to provide some financial relief for student loan borrowers who were bogged down by steep interest rates and hefty loan balances. 

On March 13, 2020, all eligible Federal student loans were placed on administrative forbearance, automatically pausing payments and setting interest rates to 0%. 

Since the spring of 2020, this student loan moratorium has been extended numerous times and many borrowers haven’t made a payment at all in almost three years. In fact, 57% of borrowers have not made a single payment during the pause, according to an NPR/Ipsos poll. 

In that time, lawmakers have proposed long-term solutions in the form of debt relief programs to address the mounting student loan debt crisis—with the current national student loan balance standing at $1.7 trillion, owed by 48 million borrowers. President Biden proposed  a plan to forgive up to $10,000 to $20,000 per federal borrower who meets certain requirements—although this proposal has faced an uphill battle and court orders are blocking the Department of Education from discharging student loan debt and accepting additional applications for relief. Without an additional extension or permanent legislation, the student loan pause is set to end 60 days after June 30, 2023. 

Some borrowers are continuing to make monthly payments  

Not all borrowers hit pause on their student loan payments. Some 8.8 million borrowers made at least one student loan payment since August 2020, and more than 40% of those borrowers made them for at least 12 months.

Making payments on your student loans while your interest rate is set to zero means that all of your money is going toward your principal student loan balance, rather than interest charges—significantly cutting down your repayment timeline. And, it’s one way to keep your financial house and avoid lifestyle creep before payments resume. 

“If you have secured financial stability in other areas, continuing to make payments is probably a prudent decision. This will help you avoid allowing your temporary extra cash flow to create ‘lifestyle creep,’ an elevation of your standard of living that could be hard to maintain, and even harder to cut back, once your payments resume,” says Brendan Halleron, certified financial planner, AIF®, BFA™, partner, and financial planner at Affiance Financial in Minneapolis. 

4 alternatives to making your regular student loan payment 

For borrowers who want to take advantage of the time left on the student loan moratorium, experts say there are ways to use those extra funds to get your financial house in order before payments start up again. 

1. Build your emergency savings. If you don’t have an emergency reserve, you might consider setting aside the amount you’d pay toward your student loans each month in a high-yield savings account. “Generally, we recommend having three months’ worth of living expenses in a high-yield savings account for life’s unexpected expenses (e.g., job loss, car repair, health emergency, etc.)” says Halleron. “Having this account at a separate institution than a checking account helps create a barrier from accessing the money for non-emergency situations. And, it could potentially earn more interest than a standard savings account.” 
2. Pay down high-interest debt. If you have any lingering credit card debt or installment debt with higher interest rates than your student loans, making extra payments on those balances before prioritizing your zero-interest student loan debt can help you reduce your liabilities overall and cut down on your repayment timeline. 
3. Put extra funds toward your investments. If you haven’t made investing a priority because of a lack of available funds, this could be your opportunity to put some of your money in the market. In fact, many investment accounts require as little as $1 to get started. Although, be warned, investing always poses some risk. This is a move you should consider after taking care of your more pressing financial obligations. 
4. Use it to max out your retirement account. One way to use your extra funds and reduce your taxable income for 2022 is to make contributions to your traditional or Roth individual retirement account (IRA). You can still make contributions until April 18, 2023.

The takeaway 

While you wait for lawmakers to come to a decision about the fate of your student loan balance, make a plan for how you’ll use that extra money each month to make the biggest impact and get a little closer to achieving one of your financial goals.